TSLA Stock After the Run-Up: The Bullish & Bearish Cases for Tesla

Tesla Motors (TSLA[1]) is the king of the investing world. TSLA stock is at all-time highs following 31% gains for the year-to-date, which is one heckuva achievement when you consider …

[2]That’s coming against a broader market that’s down this year, as measured by the S&P 500, off more than 2% so far in 2014.

That “year-to-date” is just six weeks into the year.

That performance is coming in a pretty rough start to the year for other automakers. Ford (F[3]) and Toyota (TM[4]) are each off around 4%. Honda (HMC[5]) is off 12%. And General Motors (GM[6])? The worst of the bunch, down 15% in just a few short weeks.

That it’s coming against weakness in the car market in general, and electric vehicles in specific. January was a cruddy month for vehicle sales[7], including Nissan’s (NSANY[8]) Leaf and the Chevrolet Volt.

I should be on cloud nine right now. I picked TSLA stock as my entry into the 10 Best Stocks for 2014 contest[9], in which nine other financial names and I picked one stock to buy and hold throughout 2014.

Truth be told, there are a few things that could keep new buyers out of TSLA stock for the time being, and that have given me a little pause. So, here’s a look at the potential short-term headwinds … and then we’ll remind ourselves why we should still be long-term bullish on Tesla:

3 Reasons to Ditch TSLA Stock

Valuation: Tesla’s push to $196.56 as of Monday’s close has left TSLA stock at outright gaudy numbers. Tesla technically has no trailing price-to-earnings ratio because the whole earnings part of the equation is negative over the past four quarters … but TSLA stock is trading at 123 times Wall Street estimates for 2014 earnings. I can’t really stress this enough: A decently sized company that is sitting at all-time highs, and that has gotten to said all-time highs by running up 400% in roughly a year, still trades at a triple-digit P/E. Sure, Amazon (AMZN[10]) is proof positive that you can defy valuation gravity for years, but AMZN is the gross exception, not the norm.

Relative Size: That valuation is even more troubling once you put it up against the cold reality that is Tesla’s inflated size. Namely, Tesla currently sports a market cap of $24 billion — meaning TSLA currently is worth more than 40% of $55 billion General Motors. That’s remarkable when you consider that GM delivered 2.8 million vehicles in the U.S. and 9.7 million vehicles globally in 2013 … while TSLA sold just 22,450 units of its Model S. We’ll flip this over to Baskin Financial’s[11] David Baskin (@davidpbaskin[12]) for more on just how crazy that discrepancy is:

If #Tesla[13] sold 1 million cars a year and made $3k after tax per car, it would trade at same multiple as $GM[14]. That’s only 4,000% more sales.

— David Baskin (@davidpbaskin) February 10, 2014[15]

#Tesla[13] currently has market cap of $817,000 per vehicle sold. On this basis $GM[14] with 10M vehicles/year is worth $8.17 trillion or $5,100/sh

— David Baskin (@davidpbaskin) February 10, 2014[16]

The thing is, valuations like this don’t actually mean a damn to anyone while the gravy train keeps rollin’. But figures like this can start mattering in a hurry when a momentum stock stops showing signs of breakneck growth. Tesla’s upcoming earnings report — it’s due out after the bell on Wednesday, Feb. 19 — could be such an occasion.

“Don’t Be Greedy”: TSLA stock has registered gains of more than 30% in a little more than a month. I was actually long TSLA before the contest started, so I’m sitting on even more. Frankly, I’m too conservative not to at least take partial profits — and if you have a significant chunk of Tesla stock, I’d urge you to do the same, just because it’s incredibly unlikely that Tesla will be perfect forever, which means you’ll have a chance to buy back in at better prices. It’s a gamble, but then, so’s all investing. I just prefer not to let the house take all my winnings.

If you’re long TSLA and you’re already making your way to the comments section to call me an idiot, stay your hand. I said “partial profits,” and again, I fully admit that I’m a fiscal hermit crab. Truth be told, I’m still bullish Tesla in the long term. Why? (Next page)

3 Reasons to Stay in/Buy TSLA Stock

Technicals: Tesla’s push through the $190 area puts it through a ceiling and into uncharted territory, which tends to be a favorable development for the bulls. Granted, this ceiling isn’t a particularly strong one — TSLA stock only reached this area once before, in late September 2013, before tumbling 35%. Still, if you’re looking for a short-term positive, this is it.

My Original Thesis: You can take a little comfort in TSLA stock trading for such outrageous valuations because Tesla really does have explosive growth potential. You can see the full argument here[17], but in short, Tesla is being navigated by Elon Musk, who will probably go down as one of the greatest hybrid tech-business minds of our time; Tesla’s currently small scale allows for incredible growth projections; and Tesla builds a phenomenal product that not only has an established cult following, but the praise of mainstream auto media. That’s not a guarantee of success, but I’ll take it as a firm gentleman’s handshake.

More International Optimism: Much of the projected growth is expected to come from the United States, but the recent surge in TSLA stock has come on sunshiny thoughts about Tesla’s prospects in Europe and China. Specifically, Tesla is pushing for its Model S to be included under China’s subsidies for electric vehicles — subsidies that will be much larger in the next couple of years than previously expected[18] as the country battles extensive pollution. Moreover, Musk also said last month that he believes Chinese sales might compare with U.S. volume as early as 2015[19]. Meanwhile, Tesla’s European expansion has already begun, with European deliveries accounting for 18% of sales in Q3[20], and the company is building out its Supercharger network on the continent. Europe currently has 14 Supercharger stations, and Germany is especially well connected. Via Tesla:

“By the end of March 2014, 50 percent of the German population will live within 320km of a Supercharger, and 100 percent of the population will be covered by the end of the year.”

Bottom Line

I backed TSLA stock for this contest because I do think it will be one of the best stocks of 2014 (and frankly, beyond). But that doesn’t mean it’ll be a straight line all the way to the finish.

The fact that Tesla has already run up like it has against a down market almost makes me nervous — it’s a rare big winner amid a host of big losers, and I think it’s ripe for the picking should the market continue tailing south and fund managers look to offset some of their paper losses.

So what should you do? It depends on your risk tolerance. I’m taking partial profits soon. If nothing else, I’d at least suggest setting stop-losses on at least part of your position in case TSLA stock does reverse course in the coming months.

But I certainly won’t be abandoning ship completely.

Kyle Woodley is the Deputy Managing Editor of InvestorPlace. As of this writing, he was long TSLA. Contact him at @KyleWoodley.